At the twilight hour, a United Kingdom court has ruled against changes to the London Metals Exchange (LME) warehousing rules that would have shortened the time metal could be held, impacting a hot battle that involved US regulators, aluminum producers, beverage distributors and the largest banks. The new rules were to have taken effect April 1.
Winners and losers: aluminum producers versus beverage marketers
At issue are delays in the time the metal was held in warehouse that were said to drive aluminum prices higher, an issue that led US regulators to send subpoenas to warehouse operators, including Goldman Sachs Group Inc (NYSE:GS), investigating this issue as well as tailing into investigation of commodity trading practices of the banks at large.
The court ruling is viewed as a positive to aluminum producers such as Alcoa Inc (NYSE:AA) and Rusal, the world’s largest aluminum producer, which brought forth the legal case. Consumers of metals, such as brewer MillerCoors and Anheuser Busch Inbev SA (NYSE:BUD), which had complained to regulators and motivated the action, are viewed as the losers in the UK court ruling. There had been lingering concerns regarding the new regulations negatively impacting market volume, said a Sterne Agee report.
“System is broken”
The warehouses would add a storage fee on top of the LME contract fee, impacting the end price for producers, some of whom used futures contracts to take delivery of the physical product. “With the current proposal they addressed most of the things that were not working,” Michael Widmer, an analyst at Bank of America Corp. in London, was quoted as saying at the time the new rules were initially passed. “The system is broken. The LME has a physically deliverable contract that is not physically deliverable.”
Under the regulations that were struck down, warehouses with delays in making delivery of the physical product above 50 days would have been required to deliver metal every day in excess of the amount they take in by at least 1,500 metric tons.